The fiscal pauperisation of Romania – a rich country with empty pockets

A report on the launch of Cornel Ban’s and Alexandra Rusu’s study on the fiscal system of Romania

Maria Cernat

Vladimir Mitev

This article was published on 21 January 2020 on the Romanian section of the site “The Barricade”. 

On 16th January 2020 Foundation „Friedrich Ebert” Romania presented a study, made by Cornel Ban and Alexandru Rusu, called “The Fiscal Pauperisation of Romania – What Explains It and What Can Be Done”.

The study is an effort to systematise many of the recent discourses on the causes of reduced budget income in Romania. The fiscal pauperisation is an idea, according to which Romania is not a poor country, but is impoverished by the bad tax collection. The study claims that the main cause for the reduced budgetary allocations to education and health is not the big allocations towards the institutions of force, but the poor tax collection. According to the authors, even a small improvement in this domain could lead to an allocation of 6% of GDP towards education without any problems. It remains to be discussed in what way more money would resolve the problem, which is caused by lack of political vision. It is legitimate to ask ourselves whether all the newly-collected money in the case of a fiscal reform would not go again towards security and defense.

The study matters, because of several of its important observations and conclusions:

– Romania is not a country, which suffocates the economy through taxation. Romania taxes in accordance with an inverted pyramid: it taxes strongly those who work and those who consume;

– Romania is not a poor country, which prepares to close its activity. Romania has expanded its GDP from only 39 billion dollars in 1999 to 239 billion dollars in 2019.

– Romania doesn’t tax efficiently neither the multinational companies, nor the very rich people, nor the big owners of real estate, nor the beneficiaries of speculative income;

– Romania hasn’t had gains from the fiscal relaxation it offered to the top incomes, which can be seen in long-term studies on the liberation from taxes at the top level. This fiscal easing doesn’t lead to economic progress. Even the replacement of the progressive tax with a flat tax in 2005 hasn’t led to progress.

– Romania doesn’t lose fiscal base – the sum of money, which is taxed – because of tax havens. Yes, there is some loss inclusively because of tax havens, but the great loss takes place, when multinational corporations make “fiscal planning”. It is what is called “legal tax avoidance”. In other words, the big companies move their money between various branches or between various firms, owned by the same owners through various mechanisms, which are advised by the five big accountant companies on global level (the so-called The Big 5). The multinational companies, which make great profit, start to buy various services and goods at greatly increased prices from their branches or from another firm in the same conglomerate.

– ANAF – the Romania fiscal service, is a straw man. It is an institution, which needs digitalisation, employment of hyper-qualified personnel, a good research department, changes and assistance from the countries, which have managed to fight with the big companies’ tax evasion.

– Romania has poorer results than the neighbouring country, Bulgaria, in terms of tax collection and digitalisation. Even though Bulgaria passed through a tragicomic episode, when in the summer of 2019 the personal data of 5,1 million taxpayers were stolen from NAP (the Bulgaria fiscal service), it looks like Bulgaria manages to collect in a better way taxes from the tops of the income hierarchy.

– Romania has advanced a lot in the expansion of its GDP, but has regressed a lot as far as the collection of taxes is concerned.

– The transfer of social contributions payment towards the employee has contributed significantly to the growth of budget incomes.

– The digitalisation and transparentisation of the supplied data by the ANAF and by the multinational companies is necessary. It is the public interest to know how many branches the multinationals have, where are those branches, who are the shareholders, what is the profit in each of the branches.

– The report presents a synthesis of the measures for fiscal relaxation, from which the capital has benefited: “tax break for the gains from capital, made by non-residents; significant reductions on the dividend tax for all the shareholders (from 16% to 5%), and on the taxes for residential buildings by the commercial societies; reductions for investment in actives; tax breaks on the tax for invested profit, tax breaks with regard to the obligatory payment of health contributions for people whose income comes from investment (dividends, interest rates). The taxes on capital, understood as the net value and as the value of the owned actives or transferred actives under the form of heritage and gifts are at a low level in all the EU (in medium 0,3% from the GDP), but are nonexistent in the Baltic countries and in Romania.

In essence, the inexplicably big gifts towards the people at the top of the income hierarchy, the great taxation of labour and consumption and the anemic ANAF, devoid of human resources and resources to fight the ever bigger companies, make Romania not a poor, but impoverished country. The recommendations of the report are related to a profound fiscal reform, especially with regard to ANAF becoming a modern and effective institution.

Cornel Ban’s presentation has provoked discussions, which lasted more than an hour and a half. The comments and the questions were made by political scientists, journalists, specialists in finance, politicians. Some of the speakers have pointed out that a profound fiscal reform would confront certain problems. For example, ANAF’s agents often face violence and are demoralised in their profession. Other speakers shared their knowledge of the fiscal success of Bulgaria, Poland and other countries in the region. They brought in interesting details such the one that in Bulgaria even the coffee vending machines are connected to NAP. There were also opinions which put Cornel Ban’s affirmations into doubt.

The public discussed a lot about the problem of where new budget income can be found. According to one of the speakers the underground economy in Romania is enormous and reaches 58 billion euro in experts’ view. Also, ANAF and its human resources are poorly organised. A lot of opinions affirmed that the capacity of ANAF’s department for “prices of transfer” (operations within companies or between companies with the same owners) have to be strengthened.

According to the economist Daniel Daianu from the Romanian National Bank Romania really has a problem with the reduced budgetary income. Examples for fiscal reform can be found in the zone of Central and Eastern Europe. But the decisions for reform are not taken in the public space, they are validated by economists and the parliament. Daianu believes that the digitalisation of the fiscal system is necessary and would mean greater transparency of the economy. “But it is not wanted,” admits Daianu. “We need to find autohtone resources”, adds the economist, saying that Romania has an almost innate weakness of its elites.

“The pressure about the state to digitalise the fiscal system in Denmark comes from the labour unions. A lot of the multinationals have branches, have international accounting firms”, explains Cornel Ban. He believes that the fiscal administrations can’t resist all the corporations’ strategies without massive digitalisation. Therefore, Romania also needs bold steps in digitalisation.

In this context it is worthy to mention that in 2020 for the first time NAP promises that Bulgarian citizens will have the possibility to see their fiscal declarations filled in online “automatic” by NAP and will be able also after verification to send them towards NAP without the need to gather fiscal notes from every payer of income, as they were doing before. But NAP is also a negative example in digitalisation of fiscal data – in the summer of 2019 it was revealed that the personal data of 5,1 million Bulgarians were stolen from the online system of NAP by hackers.

As a professor at the Copenhagen Business School Cornel Ban knows the situation in Northern Europe and admits that there industrial and fiscal policies are being applied. E.g. Germany has a state bank for investment in this sector. It can be understood from his presentation that he wants something similar to be made in Romania – to be established entities, through which the Romanian state could intervene in the economy in order to support industrialisation and the country’s development. Ban noted that Czechia has a profit tax of 26%. This means that it collects a lot more taxes than Bulgaria. It is also a big exporter of goods. So there are indeed examples of good practices in the industrial and fiscal domain in Central Europe.

Cornel Ban’s and Alexandra Rusu’s report also dealt with the taxation of the top 100 companies in Romania. A journalist noted that Romania has a socialist economy, because the leading companies in plenty of the economic sectors such as energy are foreign state-owned companies. Ban’s comment was short – what is valid for private multinationals as far as fiscal behaviour is concerned, is valid for the state multinationals as well.

Sorin Palsaru from the leading economic daily “Ziarul Financiar” had a longer exchange with Cornel Ban. Paslaru asked whether it is not good that the tax reductions of the last years have stimulated the capital, while keeping the budget income at almost the same levels as a percent of the GDP. Paslaru also asked why a comparison with Germany is not being made as far as the share of various taxes in GDP is concerned.

Cornel Ban noticed that in the last years Romania has reduced significantly its fiscal income, rising at the same time the non-fiscal income. So, a fiscal reform remains a must. As far as Germany is concerned, it is true that the study didn’t make a comparison with it, but Romania resembles economically more countries such as Poland, Hungary or Bulgaria and not Germany.

“People could jump against the introduction of additional taxation on real estate,” said the political scientist Sorin Ionita from the liberal think-tank Expert Forum. He noted that Romanians are a nation of home owners. More than 90% of the homes are private property. This doesn’t mean automatically that Romanians are the owners and means more that more people of the same family living together, remarked Victoria Stoiciu from Friedrich Ebert Foundation Romania. However Ionita believes that Romanians may declare certain things when they are asked about the general directions of reform, but when the changes hit their interests, resistance appears.

In any case, the success of any potential reform depends on the level of conformity by the population.

In this discussion also intervened Ruxandra Ivan from the University of Bucharest. In her view, a social consensus can be achieved on certain measures for fiscal reform. The problem is that no relevant group is interested to promote those policies. “We have policies, which use the weak state and the insufficient taxation to the benefits of their clients and sponsors, we have economic elites, which profit from that and we have social classes which are interested in the new measures, but whose voices are not heard. What mechanisms could we identify so that we could pressure politicians to adopt those measures?” she asked.

Cornel Ban’s answers were in general short. In his view Romania has almost no chance that a left-wing alliance forms the government and introduces progressive fiscal measures. In this context some politicians have also spoken.

Radu Stefan Oprea – senator from the Social Democratic Party, noted that in Romania there are not many discussions about progressive taxation (“with the exception of the emission “Decodor” of the left-wing journalist Costi Rogozanu”). In this sense the discussion, organised by the Friedrich Ebert Foundation is welcome in the senator’s view.

Could we overcome the level of theoretical discussions and to realise a legislative project in the sense of return to progressive taxation? In this sense spoke Adrian Dohotaru, an independent member of parliament from Cluj Napoca. He noted that the idea for progressive taxation could be an idea, which could unite the various left-wing forces. But there is competition between them. Dohotaru cited opinions from various left-wing circles, that is such an idea would come from the PSD, it will not be supported by Pro Romania (the party of former prime minister Victor Ponta) and vice versa. If independent voices or the non-parliamentary party Demos launch it, then the other political forces would not feel fine to support it.

Dohotaru’s remarks matter in the current political context in Romania, when a right-wing coalition in 2020 after the parliamentary elections is getting shape (comprised by the parties PNL, USR and Plus). If Romania has already entered a new era of political domination of the right-wing forces, the left will be challenged to think for a regrouping and changes.

The discussion ended with Victoria Stoiciu’s conclusion, which underlined that the discussions were necessary. In 2020 there will probably be more talk on fiscal reform. It is important that alternative voices were heard at the Friedrich Ebert Foundation’s event.

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